contrails · 56-60, M
The price of things is set by how much people are willing to pay for them. If people get together and decide pay a lot of money for them, others will think "Gee, this thing is getting more valuable by the minute, I better buy some too!!". So the more people buy it, the more "in demand" the stock is, and the higher the price gets... Because the price gets higher and higher, more and more people talk about it and then it becomes more fascinating, so it becomes MORE in demand, and then the price rises even HIGHER!
Note that it's a purely psychological thing: people pay for what they THINK the stock is worth.
It's also called a bubble... The price goes up and up until some people start realizing there is nothing that merits the stock to be THAT highly priced... Then people start selling... The demand lessen and thus the price falls... Before you know no one wants to get near the stock, and because the stock is now less and less in demand, then it's value plummets...
There is something economists called "the fundamentals" of a stock: whether a company stock has potential as a money-making business. Economist agree that gamestop fundamentals are dire... But some people in reddit decided to buy the stock, encouraging others to buy, just to prove the financial establishment wrong.
Yet, the fundamentals remain unchanged. The stock price will come back crashing down to reality and a LOT of people who cheerfully played this game will lose a lot of their money...
See also "Tulip Mania": https://en.wikipedia.org/wiki/Tulip_mania
Note that it's a purely psychological thing: people pay for what they THINK the stock is worth.
It's also called a bubble... The price goes up and up until some people start realizing there is nothing that merits the stock to be THAT highly priced... Then people start selling... The demand lessen and thus the price falls... Before you know no one wants to get near the stock, and because the stock is now less and less in demand, then it's value plummets...
There is something economists called "the fundamentals" of a stock: whether a company stock has potential as a money-making business. Economist agree that gamestop fundamentals are dire... But some people in reddit decided to buy the stock, encouraging others to buy, just to prove the financial establishment wrong.
Yet, the fundamentals remain unchanged. The stock price will come back crashing down to reality and a LOT of people who cheerfully played this game will lose a lot of their money...
See also "Tulip Mania": https://en.wikipedia.org/wiki/Tulip_mania
Northwest · M
Let's see if I can describe this at a high level.
I have 1,000 shares of GameStop. I bought them at $4 each.
GameStop is valued at $10.
ACME is a hedge fund. They did some research and think GameStop stock is going to tank due to difficulties the company is having. They think it will be trading at $4 in 3 months.
ACME contacts me, through my broker and ask if I would be interested in letting them borrow my 1,000 GameStop shares, for a fee of $1 per share, for a period of 3 months.
I agree. ACME pays me $1,000. In return for that, I hand them over my 1,000 shares of GameStop. The "buy on borrow" stipulates that ACME can now do whatever it wants with my 1,000 shares, as long as they will return them to me by the agreed upon date, which is 3 months from now.
ACME immediately sells my 1,000 shares for $10K.
In 3 months time, the stock is now trading at $4 per share. ACME buys 1,000 shares and return them to me.
ACME made $6 minus my $1 fee, or $5 per share. That's annualized to 400% return on their investment. Pretty good deal.
ACME is taking a risk. If in 3 months, GameStop is trading at $12 per share, then they would have to buy 1,000 at $12 per shares to return to me. They sold it for $10 and they're now buying back at $12. A loss of $2 per share, add to that the $1 they paid me, that's $3 per share, annualized to a 300% loss on their investment.
Now for what specifically happened with GameStop.
The hedge fund bought on borrow every single GameStop share it can get its hands on, let's say for an option price of $3 per share. Not share what the commission was, or the length of the contract.
They turned around and sold it all for $10 per share.
This other group (Robinwood, Reddit investment group, etc.) figured out what's going on, waited until the hedge fund is deep into it, and started bidding up GameStop stock. The price of a stock is based on how much you're willing to pay for it.
They were counting on enough people getting in on the pyramid scheme, to continue driving the stock price up. Within a matter of days (between Jan 12 and Han 26), the stock went from $10 per share, to $370 per share.
In the meanwhile, the hedge fund figured out what's going on, and went hyper trying to cut its losses, by buying all available shares at market price, so if on that day, the price due to overbidding is $120, then that's what the hedge fund paid for it. In the meanwhile, Robinwood, etc. who bought it at say $15, made an instant $105 per share profit. And this thing went on and on, until the hedge fund was able to buy enough shares, to return at the end of the contract. When the dust settled the price was $370 per share.
Remember that as supply shrinks, as in shares are taken out of circulation, the price goes up.
It's a dangerous game for all parties. This time around, the hedge fund was on the losing end of things. But if their math is a bit off, then those who entered the market at $370 per share, and did not have buyers (as in the hedge fund had already purchased enough shares to return them per the original contract), then you're now stuck with a loss, when the stock starts shrinking back to what it's actually worth: $10, and eventually it will.
By the time it was over, if you were part of the anti hedge fund group, then you entered at the top of the market, and you did not make money. If you entered earlier on, then you made more money. So, it's kind of a pyramid scheme, and why I have no respect for all parties involved.
Also turns out Robinwood drew on credit lines from banks, so they're not practicing what they're preaching.
I have 1,000 shares of GameStop. I bought them at $4 each.
GameStop is valued at $10.
ACME is a hedge fund. They did some research and think GameStop stock is going to tank due to difficulties the company is having. They think it will be trading at $4 in 3 months.
ACME contacts me, through my broker and ask if I would be interested in letting them borrow my 1,000 GameStop shares, for a fee of $1 per share, for a period of 3 months.
I agree. ACME pays me $1,000. In return for that, I hand them over my 1,000 shares of GameStop. The "buy on borrow" stipulates that ACME can now do whatever it wants with my 1,000 shares, as long as they will return them to me by the agreed upon date, which is 3 months from now.
ACME immediately sells my 1,000 shares for $10K.
In 3 months time, the stock is now trading at $4 per share. ACME buys 1,000 shares and return them to me.
ACME made $6 minus my $1 fee, or $5 per share. That's annualized to 400% return on their investment. Pretty good deal.
ACME is taking a risk. If in 3 months, GameStop is trading at $12 per share, then they would have to buy 1,000 at $12 per shares to return to me. They sold it for $10 and they're now buying back at $12. A loss of $2 per share, add to that the $1 they paid me, that's $3 per share, annualized to a 300% loss on their investment.
Now for what specifically happened with GameStop.
The hedge fund bought on borrow every single GameStop share it can get its hands on, let's say for an option price of $3 per share. Not share what the commission was, or the length of the contract.
They turned around and sold it all for $10 per share.
This other group (Robinwood, Reddit investment group, etc.) figured out what's going on, waited until the hedge fund is deep into it, and started bidding up GameStop stock. The price of a stock is based on how much you're willing to pay for it.
They were counting on enough people getting in on the pyramid scheme, to continue driving the stock price up. Within a matter of days (between Jan 12 and Han 26), the stock went from $10 per share, to $370 per share.
In the meanwhile, the hedge fund figured out what's going on, and went hyper trying to cut its losses, by buying all available shares at market price, so if on that day, the price due to overbidding is $120, then that's what the hedge fund paid for it. In the meanwhile, Robinwood, etc. who bought it at say $15, made an instant $105 per share profit. And this thing went on and on, until the hedge fund was able to buy enough shares, to return at the end of the contract. When the dust settled the price was $370 per share.
Remember that as supply shrinks, as in shares are taken out of circulation, the price goes up.
It's a dangerous game for all parties. This time around, the hedge fund was on the losing end of things. But if their math is a bit off, then those who entered the market at $370 per share, and did not have buyers (as in the hedge fund had already purchased enough shares to return them per the original contract), then you're now stuck with a loss, when the stock starts shrinking back to what it's actually worth: $10, and eventually it will.
By the time it was over, if you were part of the anti hedge fund group, then you entered at the top of the market, and you did not make money. If you entered earlier on, then you made more money. So, it's kind of a pyramid scheme, and why I have no respect for all parties involved.
Also turns out Robinwood drew on credit lines from banks, so they're not practicing what they're preaching.
BlueVeins · 22-25
Here's what happened:
An investment fund borrowed a shitload of Gamestop stock from a third party lender. The investment fund sold the stock to other people, which lowers the stock price. A bunch of Redditors noticed this and bought the stock, driving the price far up. This is a problem for the investment fund because they have to buy the stock again in order to pay off their debt obligation. If they can't do so, they will go bankrupt.
An investment fund borrowed a shitload of Gamestop stock from a third party lender. The investment fund sold the stock to other people, which lowers the stock price. A bunch of Redditors noticed this and bought the stock, driving the price far up. This is a problem for the investment fund because they have to buy the stock again in order to pay off their debt obligation. If they can't do so, they will go bankrupt.
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PDXNative1986 · 36-40, MVIP
@KristinaM the terminology is the shorts got squeezed, but "Screwed"... well I'll accept it.
Pretty good metaphor anyways. The shorts are getting good and properly fucked if someone drives the price up.
We have a weird market that you can make money on stocks going down in price but it's risky.
Pretty good metaphor anyways. The shorts are getting good and properly fucked if someone drives the price up.
We have a weird market that you can make money on stocks going down in price but it's risky.
PDXNative1986 · 36-40, MVIP
@KristinaM Not exactly a fan of Keiser but We did have temporary common cause because of a common enemy. [media=https://www.youtube.com/watch?v=QCM7rMIqxmk]
This is when I first learned about Short Squeezes.
Common enemies makes for strange bed fellows.
[media=https://www.youtube.com/watch?v=uNW8ZJU8HQA]
This is when I first learned about Short Squeezes.
Common enemies makes for strange bed fellows.
[media=https://www.youtube.com/watch?v=uNW8ZJU8HQA]
PDXNative1986 · 36-40, MVIP
Pfuzylogic · M
When you have enough buyers you can overwhelm the short sellers even when their short sell is based on an analysis of the financial fundamentals.
I had Rupert Murdoch burn me in 1982 on a Warner Communications stock purchase. It would have been nice to have a group roust him the same way back then.
I had Rupert Murdoch burn me in 1982 on a Warner Communications stock purchase. It would have been nice to have a group roust him the same way back then.
Pfuzylogic · M
@KristinaM
This is affecting one stock “GameStop” which was trading at $4 and went up above 10 when people looked at the short sale. People noticed the price drop and then a group on Reddit got into gear to drive the price up to well over 100 maybe 200. I wouldn’t but it now. Some people made a massive amount of money but hedge funds looked really bad when they had to cover or buy back their initial short sale.
I sold Mattel short like that but for different reasons in 1983.
This is affecting one stock “GameStop” which was trading at $4 and went up above 10 when people looked at the short sale. People noticed the price drop and then a group on Reddit got into gear to drive the price up to well over 100 maybe 200. I wouldn’t but it now. Some people made a massive amount of money but hedge funds looked really bad when they had to cover or buy back their initial short sale.
I sold Mattel short like that but for different reasons in 1983.
PDXNative1986 · 36-40, MVIP
I could actually teach a bit about what i've learned the trouble is I find finance is so abstract and unless people can get past how fake it is and how things are based on confidence and faith rather than anything tangible they have difficulty grasping it at all.
yeronlyman · 51-55, M
SomeMichGuy · M
@yeronlyman I love that the professional investors/investment fund managers WHO GOT BURNED were whining about "newbies to investing really need to be taught some things"...bc THEY have manipulated markets right along... lol
Amylynne · 26-30, F
it is NOT about finance
it IS about emotional reactions
study Human behavior instead
it IS about emotional reactions
study Human behavior instead
masterofyou · 70-79, M